The Valuation of Corporate Liabilities

J. Ericsson (Canada) and J. Reneby (Sweden)

Keywords

Credit Risk, Bond Pricing, Liquidity

Abstract

We implement a structural bond pricing frame
work on a large panel of US industrial issues using an
efficient maximum likelihood methodology. Although,
like others before us, we underpredict yield spread lev
els when using only stock market data in the estima
tion, our errors are much less dispersed. In addition,
we show that when our model underpredicts spreads,
the errors are correlated with liquidity proxies, sug
gesting that an underestimation of total yield spreads
may be economically plausible. When we include bond
price information in our estimation, our errors become
similar in magnitude to those found in recent imple
mentations of reduced form models.